The EU is finally standing up against US extraterritoriality

A market researcher at a mid-size risk analytics firm in London with a background in European politics and economics and work experience in Brussels. Professionally, Robert specialises in governance and transparency issues in the UK and continental European markets. Current areas of focus include the impact of Brexit on national industries on both sides of the Channel.

Iranian Foreign Minister Mohammad Javad Zarif meeting with High Representative of the European Union for Foreign Affairs and Security Policy, Federica Mogherini in Brussels May 2018

With US President Donald Trump unilaterally taking a sledgehammer to the Transatlantic alliance, can the EU keep the painstakingly constructed international order from disintegrating?

With the stroke of a pen, the White House succeeded in threatening the EU’s economic well-being for the second time in a month, after announcing America’s withdrawal from the Iran nuclear deal – despite almost unanimous opposition from the rest of the international community. This follows hot on the heels of the April sanctions passed against Rusal, one of Europe’s main sources of aluminium, a move that sent commodity prices skyrocketing and put at risk entire supply chains.

Currently, Brussels seems to be the best hope to keep Iran in the eponymous nuclear deal, as Tehran is making its continued adherence to the JCPOA contingent on the Union’s ability to protect bilateral trade between Iran and the bloc in the face of renewed American sanctions. The European Commission’s May 18th decision to reactivate and expand a 1996 law blocking European companies from complying with Washington’s latest sanctions against Iran, is a step in the right direction. However, it also illustrates how deep the rift between Brussels and Washington has become.

Although the move oozed defiance, it also clearly showed the vast sway that Trump holds over the EU. The EU’s welcome push-back has upped the ante in this high stakes game of chicken, while the White House has proclaimed that it will pressure allies to exit the Iran deal as well – even at the threat of imposing sanctions on European firms.

“The Europeans will see that it’s in their interests to come along with us”, threatened John Bolton, Trump’s national security advisor. However, this glib prediction is dangerously short-sighted in the face of billions of dollars’ worth of contracts already signed between major European corporations and Iran. These firms, primarily of German and French origin, have been quick to raise the alarm as they anticipate huge losses in unrealised deals if they want to avoid being struck by secondary sanctions.

Despite being ostensibly aimed at Tehran, the brunt of Trump’s new sanctions offensive will be borne by European firms. Under Washington’s stipulations, companies with commercial deals with Iran will have between 90 or 180 days to wind down activities, depending on economic sector. Firms will not be allowed to pursue new business in the country. Naturally, this is a slap in the face for Europe, with its historic political and diplomatic ties to Tehran, and its firms, who led the charge to revive business with Tehran upon the signing of the Iran deal in 2015.

For example, French manufacturer Airbus signed a contract with national carrier IranAir to sell 100 airplanes for some $19 billion. Subject to new US restrictions as a result of the 10 percent of aircraft components made in the US, Airbus says it will take “some time” to determine the full impact of the new terms. In the same vein, French oil company Total SA has been a standout first-mover following the initial Iran deal, closing a $5 billion, 20-year agreement with Iran in July last year. Carmakers PSA Peugeot Citroen, Daimler and Renault have also signed deals to produce cars in Iranian factories.

Chaos in aluminium markets

For the EU, this new wave of limitations only added insult to injury. On April 6, US sanctions on several Russian business tycoons and firms precariously undermined the EU’s access to crucial raw materials such as aluminium. With longstanding ties to newly blacklisted companies like aluminium producer Rusal, industrial groups across the continent warned of severe supply shortages jeopardizing economically indispensable manufacturing sectors. Now, the Iran sanctions are only adding to an already besieged economic climate after the fallout from the metals sanctions sowed chaos across European supply chains.

In response to the sanctions on Rusal, France, Germany, Italy and Ireland kick-started a European effort to protect their domestic SMEs and secure permanent exemptions. This coalition was responding to fears raised by major European aluminium producers, worried about the prospect of closing down their smelters. “The market is in complete shock right now”, said David Wilson, strategist at Freepoint Commodities, “[firms with] operations in the US are going, ‘we can’t use this stuff’. And that means millions of tons of metal that can’t be used.”

Gerd Götz, the director of European Aluminium, an industry association including Rio Tinto and Alcoa, cautioned that “If a cluster of this value chain is disrupted it has consequences for the whole value chain”, while Germany’s WVMetalle warned of serious “supply bottlenecks”. In such a “nightmarish scenario” downstream industries like car manufacturing would face serious disruptions, as both Daimler and Volkswagen are reliant on Russian aluminium.

Since the automotive sector alone accounts for almost 13 percent of the EU’s manufacturing employment, the stakes are high. In Germany, small and medium-sized companies – involved in car and high-tech manufacturing– provide 60 percent of all jobs. The economy of entire regions – such as Upper Franconia, where more than 100 companies maintain links to Russian firms – are inextricably linked to aluminium. By depriving these economic drivers of crucial trade connections, US-led sanctions have European SMEs grasping for straws – and generated political will in Brussels to stand reactivate the 1996 blocking regulation.

Can the EU parry the US?

The failure of Merkel’s and Macron’s attempted redress of Trump’s decision to pull out of the Iran deal during a White House visit last month serves as a warning to the rest of Europe about how vulnerable the bloc really is to the tantrums of the US president. Merkel, once dubbed the Queen of Europe, inadvertently became the symbol of this. In what sounded like chilling admission of defeat, she told reporters “The president will decide, that’s clear,” as she stood beside Trump on the lawn of the White House.

By assuming it has the right to come down on all foreign entities dealing with sanctioned Russian firms and Iran, the US has shown a chilling willingness to undermine its most important ally from two sides. But actions have reactions, and it seems that this time around, the EU will not bow down and swallow Washington’s bitter pill. The reactivation of the blocking regulation over Iran shows that Europeans are not going to beg for exemptions and be at the mercy of an increasingly abusive US. But in an increasingly adversarial transatlantic relationship, this is what it takes to escape Washington’s chokehold.